Finn M. W. Caspersen and Household International Professor of Law and Economics

Biography

Louis Kaplow is Finn M.W. Caspersen and Household International Professor of Law and Economics at Harvard Law School, Associate Director of the John M. Olin Center for Law, Economics, and Business, a Research Associate at the National Bureau of Economic Research, and a Fellow of the American Academy of Arts and Sciences. He has a Ph.D. in economics and a J.D. from Harvard University. He has published widely in the fields of taxation and public economics, antitrust, law and economics, and welfare economics and moral philosophy. He serves on editorial boards of numerous journals and has been an economic and legal consultant to government entities and private parties.

Notable publications include: (1) Competition Policy and Price Fixing (Princeton University Press 2013), and a series of articles challenging the market definition paradigm and re-analyzing the role of market power; (2) The Theory of Taxation and Public Economics (Princeton University Press 2008) and a series of related articles presenting a new framework for the analysis of taxation and related subjects in public economics; (3) Fairness versus Welfare (Harvard University Press 2002) (with Steven Shavell), an analytical argument and synthesis at the intersection of economics, moral philosophy, and law; (4) Analytical Methods for Lawyers (2nd ed., Foundation Press 2011) (with Howell Jackson, Steven Shavell, W. Kip Viscusi, and David Cope), an innovative text creating a new foundational course for law students; (5) Antitrust Analysis (7th ed., Aspen Publishing 2013) (with the late Phillip Areeda and Aaron Edlin) and an extensive survey, “Antitrust” (Handbook of Law and Economics 2007) (with Carl Shapiro).

Throughout the world, the rule against price fixing is competition law's most important and least controversial prohibition. Yet there is far less consensus than meets the eye on what constitutes price fixing, and prevalent understandings conflict with the teachings of oligopoly theory that supposedly underlie modern competition policy.
Competition Policy and Price Fixing provides the needed analytical foundation. It offers a fresh, in-depth exploration of competition law's horizontal agreement requirement, presents a systematic analysis of how best to address the problem of coordinated oligopolistic price elevation, and compares the resulting direct approach to the orthodox prohibition.
In doing so, Louis Kaplow elaborates the relevant benefits and costs of potential solutions, investigates how coordinated price elevation is best detected in light of the error costs associated with different types of proof, and examines appropriate sanctions. Existing literature devotes remarkably little attention to these key subjects and instead concerns itself with limiting penalties to certain sorts of interfirm communications. Challenging conventional wisdom, Kaplow shows how this circumscribed view is less well grounded in the statutes, principles, and precedents of competition law than is a more direct, functional proscription. More important, by comparison to the communications-based prohibition, he explains how the direct approach targets situations that involve both greater social harm and less risk of chilling desirable behavior--and is also easier to apply.

Louis Kaplow, The Theory of Taxation and Public Economics (Princeton Univ. Press 2008).

Categories:

Disciplinary Perspectives & Law

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Taxation

Sub-Categories:

Law & Economics

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Tax Policy

Links:

Type: Book

Abstract

The Theory of Taxation and Public Economics presents a unified conceptual framework for analyzing taxation--the first to be systematically developed in several decades. An original treatment of the subject rather than a textbook synthesis, the book contains new analysis that generates novel results, including some that overturn long-standing conventional wisdom. This fresh approach should change thinking, research, and teaching for decades to come.
Building on the work of James Mirrlees, Anthony Atkinson and Joseph Stiglitz, and subsequent researchers, and in the spirit of classics by A. C. Pigou, William Vickrey, and Richard Musgrave, this book steps back from particular lines of inquiry to consider the field as a whole, including the relationships among different fiscal instruments. Louis Kaplow puts forward a framework that makes it possible to rigorously examine both distributive and distortionary effects of particular policies despite their complex interactions with others. To do so, various reforms--ranging from commodity or estate and gift taxation to regulation and public goods provision--are combined with a distributively offsetting adjustment to the income tax. The resulting distribution-neutral reform package holds much constant while leaving in play the distinctive effects of the policy instrument under consideration. By applying this common methodology to disparate subjects, The Theory of Taxation and Public Economics produces significant cross-fertilization and yields solutions to previously intractable problems.

The thesis of this Article is that the assessment of legal policies should depend exclusively on their effects on individuals'welfare. In particular, in the evaluation of legal policies, no independent weight should be accorded to conceptions of fairness, such as corrective justice and desert in punishment. (However, the logic leading to this conclusion does not apply to concern about equity in the distribution of income, which is often discussed under the rubric of fairness.)
Our analysis begins with the argument that, when the choice of legal rules is based even in part on notions of fairness, individuals tend to be made worse off. Indeed, if any notion of fairness is ascribed evaluative weight, everyone will necessarily be made worse off in some situations. Moreover, when we examine principles of fairness and the literature that advances them, we find it difficult to identify reasons that, on reflection,
justify granting importance to these principles at the expense of individuals' well-being. Nevertheless, policy analysts and the population at large obviously find notions of fairness appealing. We conjecture that the notions' attractiveness is rooted in several factors. Namely, individuals who believe in ideas of fairness tend to behave better toward others; the notions may serve as proxy goals for instrumental objectives; and individuals may have a taste for satisfaction of the notions. Furthermore, each of these factors is a reason that notions of fairness are relevant under a welfare-oriented normative approach to social decision making. As we explain, however, none of these factors warrants treating notions of fairness as independent evaluative principles.
We develop our thesis through consideration of specific conceptions of fairness that are employed in major areas of the law: torts, contracts, legal procedure, and law enforcement. We also discuss the implications of our analysis for our primary audience, legal academics and other legal policy analysts, as well as for government officials, notably, legislators, regulators, and judges.

Prominent theory research on voting uses models in which expected pivotality drives voters' turnout decisions and hence determines voting outcomes. It is recognized, however, that such work is at odds with Downs's paradox: in practice, many individuals turn out for reasons unrelated to pivotality, and their votes overwhelm the forces analyzed in pivotality-based models. Accordingly, we examine a complementary model of large-N elections at the opposite end of the spectrum, where pivotality effects vanish and turnout is driven entirely by individuals' direct costs and benefits from the act of voting itself. Under certain conditions, the level of turnout is irrelevant to representativeness and thus to voting outcomes. Under others, \anything is possible"; starting with any given distribution of preferences in the underlying population, there can arise any other distribution of preferences in the turnout set and thus any outcome within the range of the voting mechanism. Particular skews in terms of representativeness are characterized. The introduction of noise in the relationship between underlying preferences and individuals' direct costs and benefits from voting produces, in the limit, fully representative turnout. To illustrate the potential disconnect between the level of turnout (a focus of much empirical literature) and representativeness, we present a simple example in which, as noise increases, the turnout level monotonically falls yet representativeness monotonically rises.

Specialized theoretical and empirical research should in principle be embedded in a unified framework that identifies the relevant interactions among different phenomena, enables an appropriate matching of policy instruments to objectives, and grounds normative analysis in individuals’ utilities and a social welfare function. This article advances an approach that both provides integration across many dimensions and contexts and also identifies which tasks may be undertaken separately and how such analysis should be conducted so as to be consistent with the underlying framework. It employs the distribution-neutral methodology and welfare analysis developed in Kaplow (2008a) and related work, offering applications to income taxation, commodity taxation, tax expenditures, externalities, public goods, capital income and wealth taxation, social security and retirement savings, estate and gift taxation, and transfer programs. It also explores welfare criteria and examines how their consideration enables the normative analysis of the taxation of families, heterogeneous preferences, and tax administration and enforcement.

Does significant market power or the presence of large rents affect optimal income taxation, calling for greater redistribution due to tainted gains? Or perhaps less because of an additional wedge that distorts labor effort? Do concerns about inequality have implications for antitrust, regulation, trade, and other policies that influence market power, which contributes to inequality? This article addresses these questions in a model with heterogeneous abilities and hence a concern for distribution, markups, multiple sectors, ownership that is a function of income, allowance for any share of profits to be recoveries of investments (including rent-seeking efforts), endogenous labor supply, and a nonlinear income tax. In this model, proportional markups with no profit dissipation have no effect on the economy, and a policy that reduces a nonproportional markup raises (lowers) welfare when it is higher (lower) than a weighted average of other markups. With proportional (partial or full) profit dissipation, proportional markups are equivalent to a downward shift of the distribution of abilities, and the welfare effect of correcting nonproportional markups associated with nonproportional profit dissipation now depends also on the degree of dissipation and how that is affected by the policy. In all cases, optimal policies maximize consumer plus producer surplus, without regard to a policy’s distributive effects on consumers and profits or how markups and income taxation distort labor effort.

Important doctrines in diverse areas of law employ structured decision procedures requiring, in rough terms, that the plaintiff first make some demonstration of harm; if but only if that is done, the defendant must make some showing of benefit; and if but only if that occurs, balancing is performed. This Article compares such protocols to unconstrained balancing and finds them to be inferior with respect to the quality of final decisions: they sometimes fail to impose liability even though the harm is greater than the benefit, and they sometimes impose liability even though the benefit exceeds the harm. The Article also develops the principles of optimal information (evidence) collection and shows how structured decision procedures violate every core lesson and presuppose distinctions that often are incoherent or impractical to implement. The analysis addresses concerns about balancing that may motivate structured protocols, how less restrictive alternatives should be assessed, and the extent to which legal proceedings are conducted in conformity with either approach, as well as how they might be reformed.

Important doctrines in diverse areas of law employ structured decision procedures requiring, in rough terms, that the plaintiff first make some demonstration of harm; if but only if that is done, the defendant must make some showing of benefit; and if but only if that occurs, balancing is performed. In-depth analysis of such protocols reveals them to be inferior to unconstrained balancing with respect to the quality of final decisions and the guidance they provide for the collection of information and, accordingly, the conduct of adjudication. This article applies this analysis to the rule of reason and merger regulation under antitrust law, Title VII disparate impact law, and the practices of strict scrutiny and proportionality analysis in constitutional law. Longstanding controversies are addressed and unappreciated deficiencies are discovered. In all three domains, existing law is cast in a substantially different light, both descriptively and normatively.
Legal rules, adjudication, information, balancing, rule of reason, mergers, disparate impact, Title VII, strict scrutiny, proportionality analysis.

The prohibition against price fixing is competition law's most important and least controversial provision. Yet there is far less consensus than meets the eye on what constitutes price fixing, and prevalent understandings cannot be reconciled with principles of oligopoly theory. This article (1) presents a fundamental reconceptualization of our understanding of horizontal agreements, (2) develops a systematic analysis of price-fixing policy that focuses on its deterrence benefits and chilling costs, and (3) compares this direct approach to commentators’ favored formulations that typically involve some sort of formalistic communications-based prohibition. By targeting a subset of means rather than the illicit ends, conventional formulations tend to impose liability in cases with lower deterrence benefits and greater chilling costs than those reached under a direct approach and to incur greater administrative costs as well.

Recoupment inquiries play an important role in predatory pricing cases. Nevertheless, their place in antitrust analysis is unclear and potentially problematic in ways that are not fully appreciated. Does a recoupment requirement define, augment, or replace the preexisting monopoly power requirement that involves similar analysis? How can a recoupment test be inserted in sequential assessments of alleged predatory pricing when all of the steps are intertwined with the others, including those deemed to come later? Why is a plaintiff permitted to show either that recoupment was ex ante plausible or that sufficient ex post profit recovery occurred, rather than requiring one in particular, or both? This article addresses these questions by examining the underlying purposes of recoupment assessments and predatory pricing inquiries more broadly. As will become evident, much of the analysis is relevant not just to predatory pricing but to other forms of anticompetitive conduct as well.

This article translates and extends Becker (1968) from public law enforcement to private litigation by examining optimal legal system design in a model with private suits, signals of case strength, court error, and two types of primary behavior: harmful acts that may be deterred and benign acts that may be chilled. The instruments examined are filing fees or subsidies that may be imposed on either party, damage awards and payments by unsuccessful plaintiffs (each of which may be decoupled), and the stringency of the evidence threshold (burden of proof). With no constraints, results arbitrarily close to the first best can be implemented. Prior analyses of optimal damage awards, decoupling, and fee shifting are shown to involve special cases. More important, previous results change qualitatively when implicit assumptions are relaxed. For example, introducing a filing fee can make it optimal to minimize what losing plaintiffs pay winning defendants and to reduce the evidence threshold as much as possible — even though the direct effect of these adjustments is to chill desirable behavior, a key feature absent in prior work.

In many settings, there are preliminary or interim decision points at which legal cases may be terminated: e.g., motions to dismiss and for summary judgment in U.S. civil litigation, grand jury decisions in criminal cases, and agencies’ screening and other exercises of discretion in pursuing investigations. This article analyzes how the decision whether to continue versus terminate should optimally be made when (A) proceeding to the next stage generates further information but at a cost to both the defendant and the government and (B) the prospect of going forward, and ultimately imposing sanctions, deters harmful acts and also chills desirable behavior. This subject involves a mechanism design analogue to the standard value of information problem, one that proves to be qualitatively different and notably more complex. Numerous factors enter into the optimal decision rule – some expected, some subtle, and some counterintuitive. The optimal rule for initial or intermediate stages is also qualitatively different from that for assigning liability at the final stage of adjudication.

Who will vote quadratically in large-N elections under quadratic voting (QV)? First, who will vote? Although the core QV literature assumes that everyone votes, turnout is endogenous. Drawing on other work, we consider the representativeness of endogenously determined turnout under QV. Second, who will vote quadratically? Conditional on turning out, we examine reasons that, in large-N elections, the number of votes that an individual casts may deviate substantially from that under pure, rational QV equilibrium play. Because turnout itself is driven by other factors, the same determinants may influence how voters who do turn out choose the quantity of votes to cast. Independently, the number of votes actually cast may deviate dramatically from pure QV predictions because of the complex and refined nature of equilibrium play. Most plausibly, voting behavior and outcomes would be determined predominately by social and psychological forces, would exhibit few of the features emphasized in the analysis of hyper-rational equilibrium play, and would have consequential properties that require a different research agenda to bring into focus. Some of our analysis also has implications for voting behavior under other procedures, including one person, one vote.

Market power is the most important determinant of liability in competition law cases throughout the world. Yet fundamental questions on the relevance of market power are underanalyzed, if examined at all: When and why should we inquire into market power? How much should we require? Should market power be viewed as one thing, regardless of the practice under scrutiny and independent of the pertinent anticompetitive and procompetitive explanations for its use? Does each component of market power have the same probative force? Or even influence optimal liability determinations in the same direction? This Article’s ground-up investigation of market power finds that the answers often differ from what is generally believed and sometimes are surprising — notably, higher levels of certain market power measures or particular market power components sometimes disfavor liability. This gulf between conventional wisdom and correct understanding suggests the need to redirect research agendas, agency guidance, and competition law doctrine.

A recent wave of literature, partly motivated by presidential campaign tax reform plans, analyzes tax expenditure limitation proposals. These reforms are often advanced not only, or even primarily, because they reduce distortions caused by favoritism for some types of expenditures over others. Largely they are urged for a number of other reasons: on distributive grounds, because the resulting broader base enables lower marginal tax rates and hence less distortion of labor effort and other margins, and to raise revenue without requiring higher marginal tax rates. It is generally recognized that the particular results on these dimensions are heavily dependent on what sorts of rate adjustments are used to return the proceeds to taxpayers. Often, revenue neutrality is assumed. This essay advances a complementary, distribution-neutral perspective on the analysis of tax expenditure limitations. Distribution-neutral implementation provides an illuminating benchmark against which to understand prior analysts’ large number of results and, more importantly, clarifies the analysis, particularly of the distribution-distortion tradeoff. The central lessons contradict the common belief that one can have less distortion of labor supply through lower marginal tax rates while also maintaining or enhancing progressivity.

This law school casebook was developed by a team of professors at Harvard Law School to introduce students with little or no quantitative background to the basic analytical techniques that attorneys need to master to represent their clients effectively. This casebook presents clear explanations of decision analysis, games and information, contracting, accounting, finance, microeconomics, economic analysis of the law, fundamentals of statistics, and multiple regression analysis. References and examples have been thoroughly updated for this 3rd edition, and exposition of a number of key topics has been reworked to reflect insights gained from teaching these topics using the 1st edition to many hundreds of Harvard Law students over the past decade.

Competition law’s vertical agreement requirement is widely regarded to be perplexing and to offer a fairly limited unilateral action defense. These views prove to be understated. The underlying distinction is incoherent on a number of levels and difficult to reconcile with pertinent statutes, precedent, and practice. The requirement has little nexus with competition policy, and its satisfaction may even be associated with less, not more, anticompetitive danger. Furthermore, reflection on the thinness or nonexistence of the vertical agreement requirement renders problematic a central feature of competition law: the aim to subject myriad everyday actions of countless firms to more lenient scrutiny than that applicable to agreements, which on reflection are ever-present.

Market definition and market power are central features of competition law and practice but pose serious challenges. On one hand, market definition suffers decisive logical infirmities that render it infeasible, unnecessary, and counterproductive, and the practice of stating market power requirements as market share threshold tests is incoherent as a matter of empirics and policy. On the other hand, market power is often probative of the desirability of liability, yet the typically assumed functional relationship is unexplored and often implausible. These latter deficiencies are addressed through a ground-up analysis of the channels by which market power can be relevant. It is important to explicitly and simultaneously consider both anti-competitive and pro-competitive explanations for challenged practices and to attend to the magnitudes of the social consequences of correct and mistaken imposition of liability in order to identify the various ways and senses in which market power bears on optimal decision-making.

Adjudication is fundamentally about information, usually concerning individuals' previous or proposed behavior. Legal system design is challenging because information ordinarily is costly and imperfect. This Article analyzes a broad array of system features, asking throughout whether design should aim at the truth or at consequences, how these approaches may differ, and what general lessons may be drawn from the comparison. It will emerge that the differences in approach are often large and their character is sometimes counterintuitive. Accordingly, system engineers concerned with social welfare need to aim explicitly at consequences. This message is not one opposed to truth per se but rather a strong admonition: it is dangerous to be attached to the alluring view that adjudication is primarily about generating results most in accord with the truth of the matter at hand.

A central justification for social insurance and for other policies aimed at retirement savings is that individuals may fail to make adequate provision during their working years. Much research has focused on myopia and other behavioral limitations. Yet little attention has been devoted to how these infirmities, and government policies to rectify them, influence labor supply. This linkage could be extremely important in light of the large pre-existing distortion due to income and consumption taxation and income-based transfer programs. For example, might myopic individuals, as a first approximation, view payroll taxes and other withholding to fund retirement savings as akin to an income tax, while largely ignoring the distant future retirement benefits that they fund? If so, the distortion of labor supply may be many times higher than otherwise, making savings-promotion policies much more costly than appreciated. Or consider what may be the labor supply implications for an individual who is defaulted into higher savings and, as a consequence, sees concomitantly lower take-home pay. This essay offers a preliminary, conceptual exploration of these questions. In most of the cases considered, savings policies do not act purely like a tax despite individuals’ non-optimizing savings behavior, and in some cases labor supply actually is raised, not lowered, in which event policies that boost savings may be significantly more welfare-enhancing than recognized. Accordingly, there is a compelling need for empirical exploration of the interaction between nonoptimal savings behavior and labor supply.

This article analyzes the effect of savings-related policies on labor supply in a model that explicitly incorporates myopic decision-making. Both social security and capital taxation may cause labor supply to rise or fall when individuals are myopic, depending on the curvature of individuals' utility as a function of consumption. Moreover, whatever is the sign of these effects under one assumption about how myopia relates to labor supply decisions, the sign is reversed under the other assumption that is considered. Additionally, some interventions have a first-order effect on labor supply from the outset but others do not, and some labor supply effects rise with the magnitude of the intervention whereas others fall.

Various legal decision-making criteria can be formulated as likelihood ratio tests, wherein liability, prohibition, or other outcomes are associated with evidence strength exceeding a posited threshold. Stating rules in this manner clarifies their nature, facilitates the comparison of conventional and optimal rules as well as the identification of differences between rules across contexts, and provides further illumination in instances in which a decision standard is not truly a likelihood ratio test.

Market definition has long held a central place in competition law. This entry surveys recent analytical work that has called the market definition paradigm into question on a number of fronts: whether the process is feasible, whether market share threshold tests are coherent, whether the hypothetical monopolist test in merger guidelines is counterproductive, and whether and when the frequent focus on cross-elasticities is useful.

Louis Kaplow, Multistage Adjudication, 126 Harv. L. Rev. 1179 (2013).

Categories:

Civil Practice & Procedure

Sub-Categories:

Litigation & Settlement

Links:

Type: Article

Abstract

Legal proceedings often involve multiple stages: U.S. civil litigation allows motions to dismiss and for summary judgment prior to trial; government agencies as well as prosecutors employ investigative and screening processes before initiating formal adjudication; and many Continental tribunals move forward sequentially. Decisionmaking criteria have proved controversial, as indicated by reactions to the Supreme Court's recent decisions in Twombly and Iqbal and its 1986 summary judgment trilogy, which together implicate the Supreme Court cases most cited by federal courts. Neither jurists nor commentators have articulated coherent, noncircular legal standards, and no attempt has been made to examine systematically how decisions at different procedural stages should ideally be made in light of the legal system's objectives. This Article presents a foundational analysis of the subject. The investigation illuminates central elements of legal system design, recasts existing debates about decision standards, identifies pathways for reform, and provides new perspectives on the nature of facts and evidence and on the relationship between substantive and procedural law.

In recent articles, I have advanced a number of criticisms of the market
definition/redefinition paradigm, chief among them that market definition is impossible and counterproductive. First, there is no valid way to infer market power from market shares in redefined (non-homogeneous-goods) markets. Second, one cannot choose which market definition is superior without already having in hand one’s best estimate of market power, rendering the exercise pointless. Worse, market power inferences in the chosen market are
inferior to the best estimate with which one began. After elaborating these points, this Essay applies them to the three main settings in which the hypothetical monopolist test is employed in various jurisdictions’ merger guidelines, showing this test to be counterproductive in every instance. Finally, it addresses reasons that some are nevertheless reluctant to abandon market definition altogether.

Louis Kaplow, Optimal Control of Externalities in the Presence of Income Taxation, 53 Int'l. Econ. Rev. 487 (2012).

Categories:

Taxation

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Disciplinary Perspectives & Law

Sub-Categories:

Law & Economics

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Tax Policy

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Type: Article

Abstract

A substantial literature examines how the Pigouvian directive that marginal taxes should equal marginal external harms needs to be modified in light of the preexisting distortion due to labor income taxation. Additional literature considers distributive concerns. It is demonstrated, however, that simple first-best rules unmodified for labor supply distortion or distribution are correct in the model examined. Specifically, setting all commodity taxes equal to marginal harms (and subsidies equal to marginal benefits) can generate a Pareto improvement, as can a marginal reform toward the first-best. Qualifications and explanations for differences from previous work are also presented.

Louis Kaplow, Burden of Proof, 121 Yale L.J. 738 (2012).

Categories:

Civil Practice & Procedure

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Disciplinary Perspectives & Law

Sub-Categories:

Evidence

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Practice & Procedure

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Litigation & Settlement

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Law & Economics

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Type: Article

Abstract

The burden of proof is a central feature of all systems of adjudication, yet one that has been subject to little normative analysis. This Article examines how strong evidence should have to be in order to assign liability when the objective is to maximize social welfare. In basic settings, there is a tradeoff between deterrence benefits and chilling costs, and the optimal proof requirement is determined by factors that are almost entirely distinct from those underlying the preponderance of the evidence rule and other traditional standards. As a consequence, these familiar burden of proof rules have some surprising properties, as do alternative criteria that have been advanced. The Article also considers how setting the proof burden interacts with other features of legal system design: the determination of enforcement effort, the level of sanctions, and the degree of accuracy of adjudication. It compares and contrasts a variety of legal environments and methods of enforcement, explaining how the appropriate proof requirements differ qualitatively across contexts. Most of the questions raised and answers presented differ in kind as well as in result from those in prior literature.

Louis Kaplow, General Characteristics of Rules, in 7 Encyclopedia of Law and Economics 18 (Francesco Parisi ed., 2nd ed. 2012).

Categories:

Disciplinary Perspectives & Law

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Civil Practice & Procedure

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Government & Politics

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Environmental Law

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Criminal Law & Procedure

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Litigation & Settlement

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Torts

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Law & Economics

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Law & Behavioral Sciences

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Administrative Law & Agencies

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Type: Book

Abstract

This entry addresses two fundamental characteristics of rules. The first concerns the degree of precision, detail, or complexity they embody: how finely are different sorts of behavior to be distinguished? A second aspect of legal commands concerns when a given level of detail is provided -- at the time of promulgation ("rules") or subsequent to individuals' actions, in the context of an adjudication ("standards"). These aspects of rules are considered from a perspective that focuses upon information costs and dissemination: different sorts of legal commands involve differing costs of formulation and application by private parties (deciding upon their own conduct) and adjudicators, and the character of laws also influences how well parties actually will understand the law and conform their conduct accordingly. The discussion encompasses related questions involving the role of precedent, the evolution of the law over time, legal uncertainly, and accuracy in adjudication. This entry also addresses the separate problem of how changes in legal rules should apply to prior behavior or pre-existing investments -- issues of retroactivity and transition.

In a recent series of articles, I argue that the market definition/market share paradigm should be abandoned entirely. Among my central claims are that: (1) as a matter of economic logic, there exists no valid way to infer market power from the market shares in redefined (non-homogeneous-goods) markets — short of entirely reversing the market redefinition; and (2) choosing a best market requires already having in hand one’s best estimate of market power, rendering the exercise pointless — actually worse, since the market power inference from the chosen market is inferior to the estimate with which one began. Not surprisingly, criticisms advanced in this Symposium and elsewhere do not succeed in repealing the laws of logic, any more than medieval alchemists were able to overturn the laws of nature.

Louis Kaplow, On the Choice of Welfare Standards in Competition Law, inGoals of Competition Law 3 (Daniel Zimmer ed., 2012).

The burden of proof, a central feature of adjudication and other decision-making contexts, constitutes an important but largely unappreciated policy instrument. The optimal strength of the burden of proof, as well as optimal enforcement effort and sanctions, involves trading off deterrence and the chilling of desirable behavior, the latter being absent in previous work. The character of the optimum differs markedly from prior results and from conventional understandings of proof burdens. There are important divergences across models in which enforcement involves monitoring, investigation, and auditing. A number of extensions are analyzed, in one instance nullifying key results in prior work.

Substantial evidence suggests that savings behavior may depart from neoclassical optimization. This article examines the implications of raising the savings rate-whether through social security, retirement plans, or otherwise-for labor supply, where labor supply is determined by behavioral utility functions that reflect the non-neoclassical character of savings behavior. Under one formulation, raising the targeted savings rate increases labor supply regardless of the slope of the labor supply curve; under a second, raising the targeted savings rate has the same effect on labor supply as that of raising the labor income tax rate; and under a third, raising the targeted savings rate has no effect on labor supply. Effects on labor supply are particularly consequential because of the significant preexisting distortion due to labor income taxation.

Louis Kaplow, An Optimal Tax System, 32 Fiscal Stud. 415 (2011).

Categories:

Taxation

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Disciplinary Perspectives & Law

Sub-Categories:

Law & Economics

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Tax Policy

Links:

Type: Article

Abstract

A notable feature and principal virtue of Tax by Design is its system-wide perspective on different elements of the tax system. This review essay builds on this trait and offers a more explicit foundation for the report's general approach, drawing on a distribution-neutral methodology that is developed in other work. This technique is then employed to illuminate and extend Tax by Design's analysis regarding the VAT, environmental taxation, wealth transfer taxation and income transfers.

The recently issued revision of the US Horizontal Merger Guidelines, like its predecessors and mirrored by similar guidelines throughout the world, devotes substantial attention to the market definition process and the implications of market shares in the market that is selected. Nevertheless, some controversy concerning the revised Guidelines questions their increased openness toward more direct, economically based methods of predicting the competitive effects of mergers. By contrast, this article suggests that, as a matter of economic logic, the Guidelines revision can only be criticized for its timidity. Indeed, economic principles unambiguously favor elimination of the market definition process altogether.

In competition law, market power requirements are often articulated in terms of market shares. The use of market share thresholds, however, conflates two distinct questions: First, how much market power exists in a given situation? Second, how much market power should the law require? As a consequence, neither question is answered, or even directly illuminated. Furthermore, because market shares are not themselves measures of market power but instead merely a factor that bears on its magnitude in a given setting, they are inapt answers to both inquiries. Their use involves a category mistake. The identified problems are illustrated by unpacking Learned Hand's famous pronouncement in Alcoa of the market shares required for the offense of monopolization, but the core defects characterize all market share declarations.

Competition law's prohibition on price fixing and related horizontal agreements is one of its few uncontroversial provisions and is understood to be well grounded in economic principles that are taken to provide the foundation for competition policy. Upon examination, however, commonly offered views of the law's conception of agreement prove to be difficult to articulate in an operational manner, at odds with key aspects of legal doctrine and practice, and unrelated to core elements of modern oligopoly theory. This Article explores these and other features of the agreement requirement and suggests the need for a wholesale rethinking of how competition law should approach the oligopoly problem.

This article addresses two issues relating to the choice between a consumer welfare and total welfare standard for competition law. First, it considers whether distributive considerations may favor a consumer welfare standard, or at least some underweighting of producer surplus in a total welfare assessment. The argument that focusing on consumer welfare is poorly targeted to general redistributive objectives is correct but not decisive since the distributive incidences of consumer and producer surplus differ significantly. By contrast, the argument that it is more efficient to rely exclusively on the tax and transfer system to achieve general distributive objectives is normatively powerful. Second, the relevance of the preexisting level of price elevation (relative to a competitive, marginal cost benchmark) is found to be quite different under the two standards. For a given additional price increase caused by anticompetitive activity, the marginal sacrifice of consumer welfare is greatest when there is no preexisting elevation and gradually falls as the initial elevation grows. By contrast, the marginal sacrifice of total welfare (deadweight loss) is negligible when there is no preexisting elevation and rises as the initial elevation grows. This difference has implications for competition policy, most directly for that toward horizontal mergers and price-fixing, along with practices that facilitate coordinated price elevation.

The optimal stringency of the burden of proof is characterized in a model in which relaxing the proof burden enhances deterrence but also chills desirable behavior. The results are strikingly different from those in prior work that uses a simpler model in which individuals only choose whether to commit a harmful act (so only deterrence is at stake). Moreover, the qualitative differences between the optimal rule and the familiar preponderance of the evidence rule----and related rules that look to Bayesian posteriors----are great, much more so than revealed by prior work.

The choice of the proper discount rate is important in the analysis of projects whose costs and benefits extend into the future, a particularly striking feature of policies directed at climate change. Much of the literature, including prominent work by Arrow et al. (1996), Stern (2007, 2008), and Dasgupta (2008), employs a reduced-form approach that conflates social value judgments and individuals' risk preferences, the latter raising an empirical question about choices under uncertainty rather than a matter for ethical reflection. This article offers a simple, explicit decomposition that clarifies the distinction, reveals unappreciated difficulties with the reduced-form approach, and relates them to the literature. In addition, it explores how significant uncertainty about future consumption, another central factor in climate policy assessment, raises further complications regarding the relationship between social judgments and individuals' risk preferences.

This article examines optimal policy toward coordinated oligopolistic price elevation. First, it analyzes the social welfare implications of enforcement, elaborating the value of deterrence and the nature of possible chilling effects. Then, it explores a variety of means of detection, with particular attention to the sorts of errors that may arise under each. Finally, it examines the level and type of sanctions that should be employed. It emerges that there is remarkably little overlap in content between the present investigation and prior legal policy work on the subject. Some central issues have been ignored while particular resolutions of others have been taken for granted, thereby indicating the need for wholesale reassessment.

This article compares two policies toward coordinated oligopolistic price elevation. Most commentators endorse the view that the law should (and does) prohibit only those price elevations produced by certain sorts of interfirm communications, such as secret price negotiations. In contrast, little attention has been devoted to a more direct approach that encompasses all coordinated price elevations that can be detected and sanctioned effectively. It is demonstrated that the conventional formulation rests on numerous misconceptions, involves complex and costly detection if its logical implications are taken seriously, and tends to target cases with relatively low deterrence benefits and high chilling costs in contrast to those targeted under the direct approach.

This law school casebook was developed by a team of professors at Harvard Law School to introduce students with little or no quantitative background to the basic analytical techniques that attorneys need to master to represent their clients effectively. This casebook presents clear explanations of decision analysis, games and information, contracting, accounting, finance, microeconomics, economic analysis of the law, fundamentals of statistics, and multiple regression analysis. References and examples have been thoroughly updated for this 2d edition, and exposition of a number of key topics has been reworked to reflect insights gained from teaching these topics using the 1st edition to many hundreds of Harvard Law students over the past decade.

Competition law is dominated by the market definition / market share paradigm, under which a relevant market is defined and pertinent market shares therein are examined in order to make inferences about market power. This Article advances the immodest claim that the market definition process is incoherent as a matter of basic economic principles and hence should be abandoned entirely. This conclusion rests on four arguments. First, meaningful inferences of market power in redefined markets cannot be made. Second, the paradigm relies on an unarticulated notion of a standard reference market whose necessity and prior omission signal a serious gap. Third and most important, determining what market definition is best is impossible without first formulating a best estimate of market power, rendering further analysis pointless and possibly leading to erroneous outcomes. Finally, the need to define markets engenders a mistaken focus on cross-elasticities of demand for particular substitutes rather than on the market elasticity of demand, which further reduces the quality of resulting market power inferences. Although the inquiry is conceptual, brief remarks on legal doctrine suggest that creating conformity may not be unduly difficult.

Ever since Corlett and Hague, it has been understood that it tends to be optimal on second‐best grounds to (relatively) tax complements to leisure and subsidize substitutes because doing so helps to offset the distorting effect of taxation on labor supply. Yet, Atkinson and Stiglitz’s optimal income/commodity tax analysis claims to demonstrate the opposite, and derivations in leading texts on optimal taxation offer opposing conclusions regarding the sign of optimal deviation of commodity taxes from uniformity. It is demonstrated that the optimality of relatively taxing leisure complements is indeed correct, and conflicting results are explained.

This essay revisits the question of instrument choice for the regulation of externalities in the context of climate change. The central point is that the Pigouvian prescription to equate marginal control costs with the expected marginal benefits of damage reduction should guide the design of both carbon taxes and permit schemes. Because expected marginal damage rises nonlinearly, a corresponding nonlinear tax - or an equivalent price implemented through a quantity-adjusted permit scheme - is second best. Also considered are political factors, distinctive features of regulating a stock pollutant, and ex ante distortions due to the anticipation of transition relief (such as by receiving more free permits for greater emissions). Finally, distributive concerns are examined, with emphasis on the conceptual and practical benefits of addressing distributive issues with the tax and transfer system rather through adjustments to regulatory schemes that usually render them less effective.

This essay considers the appropriate conceptual framework for assessing the taxation of private transfers to individuals. Although it is conventional to emphasize the role of estate and gift taxation or inheritance taxation in redistributing income from the rich to the poor, the revenue effects of transfer taxation, and its distortionary effect on labor supply and savings, it is suggested in line with some recent work that the dominant focus should be on positive and negative externalities attributable to giving. The fundamental reason is that transfer tax reform can be combined with adjustments to other aspects of the fiscal system, notably the income tax, so as to keep constant most effects other than externalities.

The marginal social value of income redistribution is understood to depend on both the concavity of individuals' utility functions and the concavity of the social welfare function. In the pertinent literatures, notably on optimal income taxation and on normative inequality measurement, it seems to be accepted that the role of these two sources of concavity is symmetric with regard to the social concern about inequality in the distribution of income. Direct examination of the question, however, reveals that this is not the case. Concavity of utility has a simple, direct effect on the marginal social value of redistribution, as might be expected, whereas concavity of the social welfare function has a more subtle influence, one that in some cases may not be very significant. The implications of this difference are examined for some standard forms of utility and welfare functions, including particular versions that appear in the optimal income taxation literature.

Assessment of climate change policies requires aggregation of costs and benefits over time and across generations, a process ordinarily done through discounting. Choosing the correct discount rate has proved controversial and highly consequential. To clarify past analysis and guide future work, we decompose discounting along two dimensions. First, we distinguish discounting by individuals, an empirical matter that determines their behavior in models, and discounting by an outside evaluator, an ethical matter involving the choice of a social welfare function. Second, for each type of discounting, we distinguish that due to pure time preference from that attributable to curvature of the pertinent function: utility functions (of consumption) for individuals and the social welfare function (of utilities) for the evaluator. We apply our analysis to leading integrated assessment models used to evaluate climate policies. We find that past work often confounds different sources of discounting, and we offer suggestions for avoiding these difficulties. Finally, we relate the standard intergenerational framework that combines considerations of efficiency and distribution to more familiar modes of analysis that assess most policies in terms of efficiency, leaving distributive concerns to the tax and transfer system.

The present investigation incorporates utility from accumulation in an intertemporal model in order to examine effects on consumption, savings, inter vivos gifts and bequests (both to descendants and to charities), and annuitization. It is natural to explore these relationships. Moreover, in these areas there are empirical regularities that seem difficult to explain using conventional models. In choosing between inter vivos gifts and bequests to descendants, individuals seem to do far too little of the former in light of the potential estate tax savings. The magnitude of charitable bequests (versus inter vivos contributions) also seems puzzling in light of tax considerations. The next section presents the model, analyzes individuals' optimizing behavior, and derives results regarding the effects of utility from accumulation. A final section relates these findings to observed behavior.

Optimal policy analysis is complicated by problems of the second best. Two of the most important problems — non-ideal distribution and labour supply distortion — are intimately connected with limitations of income taxation. In a first-best world, individualized lump-sum taxes can be used to achieve any desired distribution without causing distortion. Accordingly, the optimal design of other government policies is dictated by familiar firstbest rules: the Samuelson cost-benefit test for public goods, the Pigouvian prescription for externalities to equate the full marginal social costs and benefits, marginal cost pricing for publicly provided goods and services and for regulated utilities, and so forth.

Optimal policy rulesincluding those regarding income taxation, commodity taxation, public goods, and externalitiesare typically derived in models with homogeneous preferences. This article reconsiders many central results for the case in which preferences for commodities, public goods, and externalities are heterogeneous. When preference differences are observable, standard second-best results in basic settings are unaffected, except those for the optimal income tax. Optimal levels of income taxation may be higher, the same, or lower on types who derive more utility from various goods, depending on the nature of preference differences and the concavity of the social welfare function. When preference differences are unobservable, all policy rules may change. The determinants of even the direction of optimal rule adjustments are many and subtle.

The Pareto principle, the seemingly incontrovertible dictum that if all individuals prefer some regime to another then so should society, may conflict with competing principles. Arrow's impossibility theorem and Sen's liberal paradox are two notable examples. Subsequent work indicates more broadly that the Pareto principle conflicts with all non-welfarist principles. This essay surveys these results, including various extensions thereof, and offers perspectives on the conflict, drawing on classical and contemporary work in political economy and economic psychology.

The view that intergenerational distributive justice and efficiency should be treated separately is familiar, yet controversial. This article elaborates the often-implicit justifications for separate treatment and provides a more express statement of how and when such treatment is appropriate. Substantial attention is devoted to an approach that holds constant the intra- and intergenerational distribution of well-being, which proves to be a valuable analytical device even for intergenerational policies that are not distribution neutral. Also explored are possible interrelationships between intergenerational distributive justice and efficiency, the choice of interest rate for discounting dollars, and how the present approach relates to those that would employ direct social weights to dollars at different points in time.

Theories of distributive justice and of the aggregate social good typically require a method of assessing each individual's situation. Among the common measures are primary goods, capabilities, and well-being. This article advances the argument that approaches that focus on the means of fulfillment, where the means are multi-dimensional, are subject to an objection if advanced as ideal normative theories. In general, it is possible to raise every individual's well-being by deviating from the dictates of means-based theories. This result is problematic not only on welfarist grounds but also if freedom, autonomy, or consent is regarded to be important. It is suggested that means-based theories nevertheless have appeal, but for instrumental, not intrinsic reasons.

How should moral sanctions and moral rewards - the moral sentiments involving feelings of guilt and of virtue - be employed to govern individuals' behavior if the objective is to maximize social welfare? In the model that we examine, guilt is a disincentive to act and virtue is an incentive because we assume that they are negative and positive sources of utility. We also suppose that guilt and virtue are costly to inculcate and are subject to certain constraints on their use. We show that the moral sentiments should be used chiefly to control externalities and further that guilt is best to employ when most harmful acts can successfully be deterred whereas virtue is best when only a few individuals can be induced to behave well. We also contrast the optimal use of guilt and virtue to optimal Pigouvian taxation and discuss extensions of our analysis.

A substantial literature addresses the design of transfer programs and policies, including the negative income tax, other means-tested transfers, the earned income tax credit, categorical assistance, and work inducements. This work is largely independent of that on the optimal nonlinear income tax, yet formulations of such a tax necessarily address how low-income individuals should be treated. This paper draws on the optimal income taxation literature to illuminate the analysis of transfer programs, including the level and shape of marginal tax rates (including phase-outs), the structure of categorical assistance, and the role of work inducements in an optimal income transfer scheme.

This is a survey of the economic principles that underlie antitrust law and how those principles relate to competition policy. We address four core subject areas: market power, collusion, mergers between competitors, and monopolization. In each area, we select the most relevant portions of current economic knowledge and use that knowledge to critically assess central features of antitrust policy. Our objective is to foster the improvement of legal regimes and also to identify topics where further analytical and empirical exploration would be useful.

This Handbook entry presents a conceptual, normative overview of the subject of taxation. It emphasizes the relationships among the main functions of taxation - notably, raising revenue, redistributing income, and correcting externalities - and the mapping between these functions and various forms of taxation. Different types of taxation as well as expenditures on transfers and public goods are each integrated into a common optimal tax framework with the income tax and commodity taxes at the core. Additional topics addressed include a range of dynamic issues, the unit of taxation, tax administration and enforcement, and tax equity.

This article addresses conceptual issues concerning the distributive incidence of public goods. Solutions depend on the specific purposes for asking the question of distributive incidence - notably, assessing the extent to which various public goods should be provided, determining how the provision of public goods affects the desirability of income redistribution, and providing a meaningful description of the distribution of well-being. In the course of the analysis, a simple and intuitive version of the benefit principle of taxation (qualitatively different from those commonly advanced in pertinent literatures) is presented, and some of the problems confronting empirical attempts to measure the distributive incidence of public goods are resolved.

Louis Kaplow, Choosing Expensive Tastes, 36 Can. J. Phil. 415 (2006).

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Disciplinary Perspectives & Law

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Law & Behavioral Sciences

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Law & Economics

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Type: Article

Abstract

Expensive tastes play an important role in contemporary theories of distributive justice. In particular, some suggest that individuals are not entitled to compensation for low well-being that is attributable to expensive tastes that the individuals have freely chosen. The origins of chosen expensive tastes have not been explored, but they should be. First, the reasons that individuals might choose them could bear on how moral analysis should take them into account. Second, the choice of expensive tastes is prima facie irrational, raising the question whether concern about individuals choosing expensive tastes is warranted in the first instance. This essay considers why, if ever, individuals might choose to develop or adopt what may appear to be expensive tastes, and it suggests that the normative implications of the answers may differ from those ordinarily associated with voluntary rational choice.

Louis Kaplow, On the Undesirability of Commodity Taxation Even When Income Taxation is Not Optimal, 90 J. Pub. Econ. 1235 (2006).

Categories:

Taxation

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Disciplinary Perspectives & Law

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Law & Economics

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Taxation - Personal Income

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Tax Policy

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Type: Article

Abstract

An important result due to Atkinson and Stiglitz (1976) [Atkinson, A.B., Stiglitz, J.E., 1976. The design of tax structure: Direct versus indirect taxation. Journal of Public Economics 6, 55–75.] is that differential commodity taxation is not optimal in the presence of an optimal nonlinear income tax (given weak separability of utility between labor and all consumption goods). This article demonstrates that this conclusion holds regardless of whether the income tax is optimal. In particular, given any commodity tax and income tax system, differential commodity taxation can be eliminated in a manner that results in a Pareto improvement. Also, differential commodity taxation can be proportionally reduced so as to generate a Pareto improvement. In addition, for commodity tax reforms that neither eliminate nor proportionally reduce differential taxation, a simple efficiency condition is offered for determining whether a Pareto improvement is possible.

The merits of capital levies depend on the likelihood of repetition, the extent of anticipation, and its effects on distribution. The relevance of these features, which in varying degrees is underdeveloped or underappreciated in pertinent literatures, is elaborated and then considered with regard to the problem of transition to a consumption tax. Other transition issues are distinguished, and specific attention is devoted to rate changes under a consumption tax and whether owners of preexisting capital are effectively compensated through higher net-of-tax returns due to repeal of the income tax. The analysis is also related to literature that examines dynamic models of taxation, particularly work simulating consumption tax transitions and assessing the optimality of capital taxation in the long run.

Various economic literatures address the question whether first-best prescriptions for government policy require modification because redistributive income taxation distorts labor supply and cannot achieve the distributive ideal. Perhaps second-best rules for public goods provision, corrective taxation, public sector pricing, and other government activity should reflect concerns about distribution and labor supply distortion. Recent work demonstrates, however, that in basic cases first-best principles remain applicable. Demonstrations make use of income tax adjustments that preserve not only budget balance but also the pre-reform distribution of utility.

Louis Kaplow, The Value of a Statistical Life and the Coefficient of Relative Risk Aversion, 31 J. Risk & Uncertainty 23 (2005).

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Disciplinary Perspectives & Law

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Law & Behavioral Sciences

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Law & Economics

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Empirical Legal Studies

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Abstract

Individuals’ risk preferences are estimated and employed in a variety of settings, notably including choices in financial, labor, and product markets. Recent work, especially in financial economics, provides estimates of individuals’ coefficients of relative risk aversion (R’s) in excess of one, and often significantly higher. However, it can be shown that high R’s imply equally high values for the income elasticity of the value of a statistical life. Yet estimates of this elasticity, derived from labor and product markets, are in the range of 0.5 to 0.6. Furthermore, it turns out that even an R below one is difficult to reconcile with these elasticity estimates. Thus, there appears to be an important (additional) anomaly involving individuals’ risk-taking behavior in different market settings.

Louis Kaplow, Why Measure Inequality?, 3 J. Econ. Ineq. 65 (2005).

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Disciplinary Perspectives & Law

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Discrimination & Civil Rights

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Social Welfare Law

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Law & Economics

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Legal Theory & Philosophy

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Abstract

A large body of literature is devoted to the measurement of income inequality, yet little attention is given to the question, Why measure inequality? However, the reasons for measurement bear importantly on whether and how measurement should be done. Upon examination, normative measures are found to be of questionable value. Descriptive measures, by contrast, may be useful, but the appropriate measure depends on the field of application rather than on general, a priori principles of the sort that are emphasized in the existing measurement literature. Measures of poverty are also considered, and similar conclusions are reached.

Louis Kaplow, On the (Ir)relevance of Distribution and Labor Supply Distortion to Government Policy, 18 J. Econ. Persp. 159 (2004).

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Disciplinary Perspectives & Law

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Government & Politics

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Taxation

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Law & Economics

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Government Benefits

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Tax Policy

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Taxation - Personal Income

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Abstract

Should the assessment of government policies, such as the provision of public goods and the control of externalities, deviate from first-best principles to account for distributive effects and the distortionary cost of labor income taxation? For example, is the optimal extent of public goods provision smaller than indicated by the Samuelson rule because finance is distortionary? Or should environmental regulations fail to internalize externalities fully if the incidence of the regulations is regressive? It is suggested that these questions are best addressed by considering distribution-neutral implementation, in which budget balance is achieved by choosing an adjustment to the income tax that offsets the distributive impact of the policy in question. In basic cases, both distribution and labor supply distortion are moot because the target policy and the tax adjustment produce offsetting effects on each. Thus, traditional first-best principles provide good benchmarks for policy analysis after all. Moreover, even when actual implementation will not be distribution neutral in aggregate, distribution-neutral policy analysis has many conceptual and practical virtues that render it quite useful to investigators.

In Fairness versus Welfare (FVW), we advance the thesis that social policies should be assessed entirely with regard to their effects on individuals' well-being. That is, no independent weight should be accorded to notions of fairness such as corrective or retributive justice or other deontological principles. Our claim is based on the demonstration that pursuit of notions of fairness has perverse effects on welfare, on other problematic aspects of the notions, and on a reconciliation of our thesis with the evident appeal of moral intuitions. Here we summarize our three arguments and explain that Professor Ripstein's commentary largely fails to respond to them. (We will pass over some of what he says because it has little to do with our book, and we will not address his rather surprising attacks on our scholarship because the reader can readily verify their inaccuracy.)

In our 2001 article in the Journal of Political Economy, we show that any non-welfarist method of policy assessment violates the Pareto principle. In their Comment, Fleurbaey, Tungodden, and Chang question whether our result is fully general without imposing what they regard to be strong assumptions (transitivity and independence). However, as we explain in this Reply, their argument is irrelevant to the thrust of our article. Specifically, their argument concedes that if any particular society uses any non-welfarist principle, there may be a conflict with the Pareto principle. This result means that the vast multitude of principles proposed by policy-makers, philosophers, and others indeed fall within our demonstration.

In Fairness versus Welfare, we advance the thesis that social policies should be assessed entirely on the basis of their effects on individuals’ well‐being. This thesis implies that no independent weight should be accorded to notions of fairness (other than many purely distributive notions). We support our thesis in three ways: by demonstrating how notions of fairness perversely reduce welfare, indeed, sometimes everyone’s well‐being; by revealing numerous other deficiencies in the notions, including their lack of sound rationales; and by providing an account of notions of fairness that explains their intuitive appeal in a manner that reinforces the conclusion that they should not be treated as independent principles in policy assessment. In this essay, we discuss these three themes and comment on issues raised by Richard Craswell, Lewis Kornhauser, and Jeremy Waldron.

Legal change, whether through legislation, regulation, or court decision, is a common phenomenon, and virtually all reform creates both gains and losses for those who under the prior regime took actions that would have lasting effects. This article offers a conceptual framework for assessing the desirability of different transition policies, ranging from compensation of losses and taxation of gains, grandfathering of pre-enactment investments, and delayed or partial implementation to complete and immediate implementation or even retroactive application. Emphasis is placed on how transitions and various mitigation strategies affect the incentives of and risk borne by private actors as well as on the behavior of government and how it may be affected by transition policy.

In this article, we ask what system of moral rules would be best from a consequentialist perspective, given certain aspects of human nature. This question is of inherent conceptual interest and is important to explore in order better to understand the moral systems that we observe and to illuminate longstanding debates in moral theory. We make what seem to be plausible assumptions about aspects of human nature and the moral sentiments and then derive conclusions about the optimal consequentialist moral system - concerning which acts should be deemed right and wrong, and to what degree. We suggest that our results have some correspondence with observed moral systems and also help to clarify certain points of disagreement among moral theorists.

Nonwelfarist principles - notably, deontological principles - are often advanced to guide moral decisions. The types of choices addressed by such principles typically seem, on their face, to involve conflicts of interests among individuals. Nevertheless, it can be demonstrated that any nonwelfarist principle will, in some circumstances, favor choices that make all individuals worse off. For a variety of reasons, this conclusion has important implications for moral theories that are understood to support nonwelfarist principles.

By what criteria should public policy be evaluated? Fairness and justice? Or the welfare of individuals? Debate over this fundamental question has spanned the ages.
Fairness versus Welfare poses a bold challenge to contemporary moral philosophy by showing that most moral principles conflict more sharply with welfare than is generally recognized. In particular, the authors demonstrate that all principles that are not based exclusively on welfare will sometimes favor policies under which literally everyone would be worse off. The book draws on the work of moral philosophers, economists, evolutionary and cognitive psychologists, and legal academics to scrutinize a number of particular subjects that have engaged legal scholars and moral philosophers.
How can the deeply problematic nature of all nonwelfarist principles be reconciled with our moral instincts and intuitions that support them? The authors offer a fascinating explanation of the origins of our moral instincts and intuitions, developing ideas originally advanced by Hume and Sidgwick and more recently explored by psychologists and evolutionary theorists. Their analysis indicates that most moral principles that seem appealing, upon examination, have a functional explanation, one that does not justify their being accorded independent weight in the assessment of public policy.
Fairness versus Welfare has profound implications for the theory and practice of policy analysis and has already generated considerable debate in academia.

The traditional view of economists has been that corrective taxes are superior to direct" regulation of harmful externalities when the state's information about control costs is incomplete. " In recent years, however, many economists seem to have adopted the view that either corrective" taxes or quantity regulation could be superior to the other. One argument for this view with Weitzman (1974), holds only if the state is constrained to use a fixed tax rate (a linear tax" schedule) even when harm is nonlinear. Corrective taxes are indeed superior to quantity" regulation if -- as seems more plausible -- the state can impose a nonlinear tax equal to the" schedule of harm or can adjust the tax rate upon learning that it diverges from marginal harm. " Another argument, associated with Baumol and Oates (1988), is that quantity regulation gains" appeal when the state is uncertain about the harm caused by an externality. In this case however, a corrective tax schedule (equal to the expected harm schedule) is superior to quantity" regulation.

The public at large, many policymakers, and a number of economists hold views of social welfare that are non‐welfarist. That is, they attach some importance to factors other than the effects of policies on individuals’ utilities. We show, however, that any non‐welfarist method of policy assessment violates the Pareto principle.

Whether and how estates and gifts should be taxed has long been a controversial subject, and the approach to estate and gift taxation varies among developed countries. Arguments for and against various forms of transfer taxation have focused on concerns about the distribution of income and wealth, intergenerational equity, raising revenue, savings incentives, and other economic and philosophical issues. This essay has two purposes. The first is to examine the conceptual basis for various arguments for and against the current estate and gift tax regime and proposed alternatives. The second is to integrate policy analysis of transfer taxation with that of the rest of the tax system, notably, the income tax. The analysis begins by considering how it would be optimal to tax transfers if they are viewed simply one of many forms of expenditure by donors, and then it explores how the distinctive features of gifts and bequests may alter the conclusions. The importance of different transfer motives is discussed, and the analysis is reconsidered in the light of the importance of human capital in intergenerational transfers; differences between inter vivos transfers and bequests, between gifts to individuals and gifts to charitable institutions, and among gifts to donees having varying relationships to the donor; and the possibility that transfers are not explained by maximizing behavior.

Most legal academics and policymakers believe that weight should be accorded to conceptions of fairness in evaluating legal policies. In other writings, we have demonstrated that adherence to any notion of fairness will sometimes lead to a conflict with the Pareto principle. That is, to endorse a notion of fairness is to endorse the view that it can be desirable to adopt a legal rule that will reduce the well-being of every person in society. In this comment, we will be arguing that Howard Chang's position in his reply to one of our articles, in which he suggests that it is possible to imagine some notions of fairness under which this conflict does not exist, is tantamount to an abandonment of logical consistency in normative assessment of policy.

Louis Kaplow & Steven Shavell, Should Legal Rules Favor the Poor? Clarifying the Role of Legal Rules and the Income Tax in Redistributing Income, 29 J. Legal Stud. 821 (2000).

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Taxation

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Disciplinary Perspectives & Law

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Law & Economics

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Taxation - Personal Income

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Type: Article

Abstract

In our 1994 article in this Journal, we demonstrated that legal rules should not be adjusted to disfavor the rich and favor the poor in order to redistribute income, because the income tax and transfer system is a more efficient means of redistribution. In this article, we revisit our argument and others that favor relying on the income tax system to redistribute income, and we then focus on qualifications to our argument that we previously offered. In particular, we elaborate on a qualification that is the subject of Chris Sanchirico's article in this issue of the Journal and explain why it has only a tangential bearing on the question whether legal rules should favor the poor and why it is of doubtful practical importance.

Alan Auerbach and Kevin Hassett offer a new measure of horizontal equity (HE) that is designed to overcome deficiencies in prior indexes. There is, however, a fundamental problem that their effort shares with their predecessors' attempts: the underlying rationale for pursuing HE at the expense of individuals' well-being is never stated. Moreover, as discussed here, it appears that no plausible rationale can be given because the essence of HE involves giving weight to morally arbitrary factors. Indeed, pursuing HE may even conflict with the Pareto principle. On reflection, it seems that the appeal of HE is specious: HE does not possess intrinsic value, but rather is a rough proxy concept that may signal various ways in which unequal treatment of individuals can lead to a loss in social welfare. Unfortunately, HE indexes are not very useful even with regard to HE's proxy role.

Our thesis is that the assessment of a legal policy should depend exclusively on its effects on human welfare, that is, on the well-being of individuals. In particular, no independent evaluative weight should be accorded to notions of fairness, such as corrective justice in tort and desert in punishment. (Concerns about the distribution of income are not, however, subject to our critique.) When the choice of legal rules is influenced by notions of fairness, individuals are often made worse off. Indeed, if the prescriptions of any notion of fairness are followed, it is always possible that everyone will be made worse off. Moreover, when we examine notions of fairness and the literature that advances them, we are unable to identify reasons that, on reflection, justify giving weight to these notions at the expense of individuals' well-being.
Nevertheless, notions of fairness are widely felt to be appealing. We suggest that this appeal can largely be explained by three factors: notions of fairness often correspond to social norms that usefully regulate everyday life; notions of fairness may serve as proxy devices for achieving instrumental objectives; and individuals may have a taste for satisfaction of the notions. However, we explain that none of these factors warrants employing notions of fairness as independent evaluative principles in the assessment of legal policy.
We develop these arguments through consideration of specific conceptions of fairness that are employed in major areas of law: tort, contract, legal procedure, and law enforcement. We also discuss the implications of our analysis for our primary audience, legal academics and other legal policy analysts, and also for government officials, notably legislators, regulators, and judges.

Most legal academics and policy makers believe that notions of fairness should be accorded positive weight in evaluating legal policies. We explain, however, that ascribing importance to any notion of fairness (other than one concerned solely with the distribution of income) will sometimes lead to a conflict with the Pareto principle. That is, to endorse a notion of fairness is to endorse the view that it can be desirable to adopt a legal rule that will reduce the well-being of every person in society.

The public at large, many policymakers, and some economists hold views of social welfare that attach some importance to factors other than individuals' utilities. This note shows that any such non-individualistic notion of social welfare conflicts with the Pareto principle.

This paper considers the optimal tax treatment of voluntary transfers to individuals in a" framework that integrates redistributive income taxation and estate and gift taxation. Under this" formulation, redistributive considerations become secondary. The optimal tax treatment of" transfers depends upon the differences between expenditures on transfers and ordinary personal" consumption. It turns out that some types of transfers confer a sort of positive externality on" donees, some create tax revenue externalities, and some affect donors' and donees' marginal" utilities of income in a manner relevant to the optimal taxation problem. Different types of" transfers have qualitatively different effects.

This is a survey of the field of economic analysis of law, focusing on the work of economists. The survey covers the three central areas of civil law liability for accidents (tort law), property law, and contracts as well as the litigation process and public enforcement of law.

Measurements of the distortionary cost of labor income taxation generally assume that there are no other distortions. Browning (1994)identifies many pre-existing distortions, argues that such distortions reduce wages below the social value of labor's marginal product, and concludes that the marginal welfare cost of labor income taxation is substantially higher than suggested by previous estimates. The primary type of distortion Browning analyzes, however, has no direct effect on the marginal distortionary cost of labor income taxation.

The complexity of the income tax is an unending source of complaint, and compliance costs are estimated to be very large. Yet most recognize that some degree of complexity is necessary if income is to be measured accurately. This article presents a framework for analyzing the value of greater accuracy in income taxation. Formulations for both distributive and incentive benefits of accuracy are offered. In addition, the article takes into account that compliance costs and the effects of complex provisions are endogenous, determined in significant part by taxpayers' information acquisition efforts. The article addresses whether taxpayers have excessive or inadequate incentives to acquire information about taxable income and to challenge tax assessments.

Louis Kaplow, A Note on the Optimal Supply of Public Goods and the Distortionary Cost of Taxation, 51 Nat’l Tax J. 117 (1998).

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Taxation

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Disciplinary Perspectives & Law

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Law & Economics

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Tax Policy

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Taxation - Personal Income

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Type: Article

Abstract

In a recent article, I demonstrated that, under standard simplifying assumptions, it is possible to finance a public good in a manner such that a Pareto improvement results whenever the simple cost-benefit test is satisfied -- that is, without any adjustment for the "marginal cost of funds." In particular, the method of finance involves adjusting the income tax so that the combined incidence of the tax adjustment and the public good is distribution neutral. One implication of this result is that, if the public good is financed in some other manner, the difference in outcome will be purely redistributive, so that any change in distortionary costs will be accompanied by an opposing change in redistributive benefits. I also showed how this analysis is applicable to determining the optimal level of environmental taxes.
Edgar Browning and Liqun Liu have written a critique of my article. It does not, however, disagree with any of these claims. Instead, their argument focuses on how one should interpret the term "distortion." It should not be surprising, however, that under any interpretation of the term -- including their preferred one -- my conclusions about how policy analysis should be conducted continue to be correct.

Louis Kaplow, Accuracy in Adjudication, in 1 The New Palgrave Dictionary of Economics and the Law 1 (Peter Newman ed., 1998).

Categories:

Government & Politics

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Disciplinary Perspectives & Law

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Civil Practice & Procedure

Sub-Categories:

Dispute Resolution

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Litigation & Settlement

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Evidence

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Remedies

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Torts

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Law & Economics

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Law & Behavioral Sciences

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Courts

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Judges & Jurisprudence

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Type: Book

Abstract

Many features of public legal systems and private schemes of dispute resolution influence the accuracy of legal outcomes, including rules of procedure and evidence, appeals, regulation of lawyers' conduct, and some aspects of substantive law. An economic inquiry into this subject is concerned with the trade-off between accuracy and cost. Much of the effort involves careful specification of the value of accuracy and cost. Much of the effort involves careful specification of the value of accuracy, which until recently has been largely taken for granted. It turns out that the benefits from greater accuracy vary greatly by context. Accordingly, the discussion separately considers problems of determining liability, assessing damages, and establishing future rights and obligations.